Utah Estate & Inheritance Tax: How to ‘Legally’ Avoid

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Paul Sundin, CPA

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Many people are relocating to Utah thanks to beautiful scenery and excellent skiing. But before you purchase assets in the state like real estate, you may want to consider whether or not Utah has an estate tax, gift tax or inheritance tax.

In this post, we will take a look at some of the tax considerations if you live in Utah or have assets in Utah.

Estate planning may be a pretty complicated process, but you can reduce the taxable part of your estate with a proper approach. While we recommend addressing professional assistance, especially if you have some sufficient property in Utah, there are several things every Utah resident should know about inheritance laws and taxes in the state.

How does it work?

The estate tax always goes hand-in-hand with the inheritance tax. It is also often referred to as the “death tax,” which is levelled on the deceased person’s estate. This estate may include all sorts of property, from real estate to stocks, cash, etc.

The taxable part of the estate is calculated before the assets have been transferred to the heir. On the contrary, the inheritance tax is applied to the assets that have already been transferred to the heirs, who instantly become responsible for paying the tax. 

Utah has neither an inheritance tax nor an estate tax. However, if the property exceeds the federal estate tax exemption bar of $12,06 million, it becomes subject to the federal estate tax.

How to reduce the taxable part of an estate in Utah?

Fortunately, Utah does not assess an estate tax. It’s actually is not that uncommon. Only 12 states have an estate tax. In general, Utah is a low taxing environment.

But even though there is no estate tax in Utah, you may be assessed estate tax at the federal level.

Utah residents may still have to pay some taxes when they inherit property. For example, there are states that impose an inheritance tax on heirs from other states. So, if you have someone living out of Utah who plans to leave you an inheritance, it is best to address a professional to study local tax laws and prepare accordingly.

To protect their legacy for the heirs, Utah residents can use the local gift tax benefits. Utah does not have any gift tax, which means that you can gift away the taxable part of your estate and deflect the federal tax pressure from it.

The federal gift tax exclusion allows you to gift away up to $16,000 to as many people as possible every year. It means that a married couple can reduce the taxable part of their estate by at least $32,000 every year without having to report it to the IRS if they have only one heir.

The absence of gift tax in Utah allows the state residents to plan their estate according to the relevant requirements of federal taxation laws. It is important to note that the lifetime exemption is also a portable matter for married couples. It means that with a proper approach to estate planning, two spouses can protect up to $24 million of their estate for the heirs.

Federal estate tax planning

I’ve got more good news for you. Even though there is a federal estate tax, most estates will be under the exemption amounts. Less than 1% of all the states fall subject to the estate tax.

But we will walk through how it is calculated. The first step is to aggregate all the estate assets. This includes mutual funds, real estate, other investments, and personal items. This also can include certain business interests and closely held companies. Evaluating these assets can be challenged for the executor.

chart with finance, tax and debt

But once assets have been identified and properly valued, you can deduct any estate debts. This includes car loans, mortgages, credit cards, and other debts.

Once the estate is reduced for these items, the executor can then offset this amount with administrative costs and funeral related expenses. The result is the net estate amount.

Once the net estate is calculated, you then just compare this to the exemption. Any amount that exceeds the exemption is generally taxed at about 40%. But be careful. Tax laws are ever-changing and there is a threat that this tax rate amount can go up in subsequent years.

How to Legally Avoid or Reduce the Utah Estate Tax

Because Utah does not impose an estate tax, you are in good shape. But the federal estate tax could still trip you up (even though few actually have a problem). There are several planning strategies that can be implemented to reduce estate tax concerns. Make sure you address the following with your CPA:

  • Crummey Trusts 
  • Dynasty Trusts
  • Donor-Advised Funds
  • Grantor Retained Unitrusts (GRUTs)
  • 529 Plans
  • Special Valuation of Farms and Businesses
  • Family Limited Partnerships (FLPs)
  • Charitable Remainder Trusts (CRUT)
  • Grantor Retained Income Trusts (GRIT)
  • Charitable Gift Annuity
  • Irrevocable Life Insurance Trust (ILIT)
  • Gifts Below Annual Exemption
  • Qualified Terminable Interest Property (QTIP)
  • Qualified Personal Residence Trusts (QPRTs) 
  • Grantor Retained Annuity Trusts (GRATs) 
  • Intentionally Defective Grantor Trust (IDGT)
  • Direct Medical and Tuition Payments 
  • Other Revocable and Irrevocable Trust Structures

Who should consider estate tax planning?

While every citizen should consider estate planning, there are certain types of people in a few professions that should be especially concerned. Many people fail to realize that retirement accounts and life insurance must also be included in an estate.

As a result, anybody with the following assets and situation should closely examine some of the planning strategies:

  • CPAs, tax and legal professionals, engineers, IT professionals
  • People who stand to receive a large inheritance
  • Business owners and entrepreneurs
  • Medical and healthcare professionals
  • Retirement accounts in excess of $1 million
  • People with life insurance policies of at least $1 million
  • People with multiple rental properties
  • Partners in passive activities
  • Consultants with high earning potential
Trust PlanningGift Structures
Irrevocable Life Insurance TrustQualified Personal Residence Trust (QPRT)
Grantor Retained Income StructureCharitable Gift Annuity
Intentionally Defective Grantor TrustCrummey Trusts

Final thoughts

Like most states, Utah does not collect a local inheritance tax. However, there are several things you should remember planning your estate or inheriting property in Utah:

  • Federal estate tax above to all properties over the $12 million exemption bar in all states;
  • The absence of inheritance tax and estate tax in Utah does not apply to properties inherited from another state that may have such taxes.

Utah is a friendly tax state, you need to make sure that you identify income tax rates, real estate, and sales tax which can be a large one consideration for many people.

If you were concerned about Utah estate tax, hopefully this is good news to you. But with the considerations of federal estate tax, make sure you hire a qualified attorney or CPA to address the issues with you.

Estate planning should be implemented while he decedent is still alive. That doesn’t mean that you can’t do anything once a person has passed away. But if you plan years in advance it can go along way to mitigating any tax issues.

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